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consider the following economy, where prices are fixed: c=100+3/4*( disposable income, t= 1/3*y , i=100, g=300, x=100, m=1/6*y. what is the equation for the aggregate expenditure curve?
In the economy of Brightland, the commercial banks have deposits of $600 billion. Their reserves
are $60 billion. All reserves are in deposits with the Central Bank and the commercial banks hold
no excess reserves. There is $120 billion in Central Bank notes outside the banks, and there are no
coins. (5 marks each)
a) What is the economy's monetary base?
b) What is the quantity of money in the economy?
c) Calculate the money multiplier.
d) Suppose the Central Bank of Brightland undertakes an open market purchase of securities of
so that the monetary base increases by $5 billion. By how much will the quantity of money change?
a. Define an open market sale by the Fed.
b. Show the impact of an open market sale on the interest rate and output. Show both the Immediate- and the longer-term impacts.
(a) ' government should step in and spend'
(b) A cut in spending by European firms
monetary policy, or the reverse, within fairly broad limits. The real basis for choice lies in
many subsidiary targets, besides real GDP and inflation, that are differentially affected by
fiscal and monetary policies.” What are some of the subsidiary targets referred to in the
quote? How would they be affected by alternative policy combinations?
How the Phillips Curve is related to the model of Aggregate Demand and Aggregate Supply. Explain using appropriate diagrams.
Explain whether each of the following events shifts the short-run aggregate supply curve, the aggregate demand curve, both or neither. For each event that does shift a curve, draw a diagram to illustrate the effect on the economy.
a) Households decide to save a larger share of their income.
b) Sri Lankan farmers suffer a prolonged period of unfavorable weather conditions for agriculture.
c) Increased job opportunities overseas cause many people to leave the country.
) List some empirical examples to support each theory which explains why the short-run aggregate supply curve is upward sloping.
2.2. Consider the following scenario. Initially the economy has 90 million people working, 10
million people unemployed, and 20 million people not in the labor force. Then prospects for the
economy improve. Five million people who previously were not in the labor force now join the 10
million previously unemployed in looking for work. For now, the economy remains with 90
million workers. What happens to the unemployment rate
